analysis of corporate governance in south korea and australia

8/14/2019 ANALYSIS OF CORPORATE GOVERNANCE IN SOUTH KOREA AND AUSTRALIA

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ANALYSIS OF CORPORATE GOVERNANCE IN SOUTH KOREA AND AUSTRALIA

INTRODUCTION

This essay outlines a detailed analysis of the corporate governance of Australia and South

Korea. Both these countries have their own corporate governance but there are some

similarities and dissimilarities which have been observed and dealt with. Before we get on to

the corporate governance in Australia or South Korea we need to define corporate

governance. The OECD provides the most authoritative functional definition of corporate

governance:

"Corporate governance is the system by which business corporations are directed and

controlled. The corporate governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as the board, managers,

shareholders and other stakeholders, and spells out the rules and procedures for making

decisions on corporate affairs. By doing this, it also provides the structure through which the

company objectives are set, and the means of attaining those objectives and monitoring

performance." (OECD)

Corporate governance introduces framework of legislative and regulatory reform to the

organisation. Its a key element of any organization. It enhances confidence of investors and

promotes competitiveness among the organization, and ultimately leads to growth in

economy.

As emphasized by James Wolfensohn, President of the World Bank:

The governance of companies is more important for world economic growth than the

government of countries. (ACCOUNTANTS)

CORPORATE GOVERNANCE IN AUSTRALIA

Corporate governance is Australia has received a lot of attention from both media and policy

makers because of the social and political implications it has on some of the major collapse of

corporate which came into light in past eighteen months. Most prominent among them were

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allegations of illegal management behaviour in the companies like HIH and Onetel adding to

the roles are companies such as Harris scarfe and AMP. (Fleming, Number 3, 2003,)

Australian corporate governance has shown changes in past forty years. The principal-agent

framework has been adopted by Australia to describe features of corporate governance

system. In this world of full information managers get contracted to act on best interest of

owners but opportunistically he may act to improve his welfare at the cost of owner.

Recent characteristics of firm in Australia are its separation between ownership and control.

In first half of twentieth century Australian companies were described as family capitalism.

With all the important positions were holds by close knit family. This was then changed in

second half of 20th century. Last forty years have also seen changes in some government

mechanism like ownership of shares with directors and managers, structure of board of

directors like its size and composition. And lastly in block holders. Research has shown that

to mitigate agency cost in the firm you need to combine these mechanisms. Board size and

component are describes as one of the key components in governance. Board of directors

monitors management and adds strategic ideas into the operations, His ability to perform

depends on the size and composition of business, as firm increases in size complexity

increases. Directors having human capital skills will be needed then. (MILAN, 2007)

Board composition in Australia consists of Executive and non executive directors. Executive

directors have both executive position and board position within the company because of

their dual role they add valuable contributions to the firm as they bring in firm specific

knowledge. They are more loyal towards organisation regardless of their non executive

counterparts. Non executive directors on the other hand are appointed for their expertise in

industry and their decision making abilities. The roles of directors differ from each other.

If we have a look at the size and composition of boards, it has changed from the last 40years

Table 5 gives the sample of board size of 23 Australian firms in 1964 and 1997. Median

board size has increased from 7 directors to 11 directors. (Fleming, Number 3, 2003,)

ASX Corporate Governance Council was formed in August 2002 to provide supported

framework, to develop and deliver to the industry. It gives practical guide to the companies

listed in this and to their investors. 21 stake holders which also include major firms, investors

are part of this council. (ASX Corporate Governance Council, 2003: Foreword). It delivered


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some set of principles regarding code of conduct, auditing, remuneration etc. organisation in

Australia formalise and disclose the functions which are reserved to the board and those

which have been delegated to the managements. This makes them transparent to its

stakeholders. In their board structure majority of board are independent directors.

Chairperson and CEO cant be the same person in Australian companies. Their decision

making is very ethical and responsible which enables them to disclose true financial

reporting. Audit committee, consists of non executive directors, independent chairperson,

independent directors and has at least three members in it. They respect the rights of

shareholders, thats the reason external auditor in any Australian organisation will attend the

annual general meeting and will be present to answer shareholder questions regarding

auditors report if any. Companies here provide full disclosure of remuneration policies, costs

and benefits of the policies, code of conduct and compliance guidelines to legitimate

stakeholders and to the investors. (Fleming, Number 3, 2003,)

In conclusion Australian corporate governance has been termed as outsider system of

corporate governance. Its somewhat same like UK corporate governance. They believe in

increasing shareholder wealth keeping in mind organisation goals.

CORPORATE GOVERNANCE IN SOUTH KOREA

In 1997 after the IMF crisis Kim Dae-Jung administration started with rapid chaebol reform.

Two features that describe chaebol is one that it is closed concentration of ownership of

founders family. And secondly their diversified business structure which was main cause of

IMF crisis.

Main reason behind Chaebol reform was to diminish old characteristics of chaebol, to

introduce Anglo American corporate governance system., Improving framework of the

corporate governance, enhancing transparency in organisation, eradicating of cross debt

guarantee, improving firms capital structure and to increase concentration on core business.

The main problem which it faced is lack in market discipline mechanism hence government

should intervene and should create an environment where market mechanism will operate

effectively. With the introduction of Anglo American style of corporate governance firm is

considered as public entity which has to follow certain social responsibilities there may be

conflict of interest among stakeholders. So it is necessary to know how growth can be

harmonized together with shareholder value and all the otherrespective cultural values.Alka Sharma, 15973547

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From past few years South Korean has seen a drastic change on the way of doing business

like transparency has improved, minority shareholders right has increased, board of directors

has been reformed by nominating independent directors (Yanagimachi, February 2004)

From January 2001, South Korean organisation are getting obligation to introduce directors

from outside. More than half of the directors should be from outside in large scale chaebol

affiliates which result in more than 2 trillion won of assets. Minimum 3 outside directors has

to be there in organisation. The regulations and qualification for outside directors were made

very strict. Composition of ownership has also seen changes after financial crisis, government

ownership has declined. Bank ownership of shares also saw a big increase after 2000. Foreign

investors also saw a sudden increase in South Korean organisation before 1998 they were

holding 12-15%of shares, it increased from 17.98% in 1998 to 36.01% in 2002. There could

be both positive and negative aspects to this rapid increase; positively it is accelerating Anglo

American corporate governance system. On the other hand there may be risk of mergers and

acquisitions. (LEE, 2004)

Audit system in South Korea, a committee is formed with at least three board members out of

whom two thirds should be outside director out of which one member have to be sound in

professional auditing knowledge. Large firms should have annual auditing done to their

financial books from external audit firm.

In conclusions, after 1997 financial crisis foreign investment became stronger, with its effect

to create Anglo American system corporate governance. Chaebols are getting disappeared I

part as there is lack of global competitiveness in them. In short it will be little difficult to

create Anglo American corporate governance system without having a deep understanding of

Korean business landscape. Both need to be harmonized to flourish in South Korea.

RECOMMENDATIONS AND CONCLUSION

While examining the corporate governance of South Korea we found out that they are closed

family owned business houses and controlled by the family members itself, they have highly

diversified business structure and debt leveraged as their capital structure. Their economic

concentration is to notice for. They always tend to spread across various industries. They

have become conglomerates of many companies in South Korea. South Koreans

organisations hold share s in each other companies. They are more centralized in control.

Chaebols in South Korea do not have a bank but go to other financial institution likeAlka Sharma, 15973547

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securities and to the insurance companies. In regards Australian firms they havent suffered

financial crisis as South Korean firms have faced. It was in no doubt affected by ripples from

the crisis occurred in the other parts of companies. It was vital for Australian economic

growth that countries in Asia pacific region are financially, politically and economically

sound. In terms of its corporate governance it has common laws system and it has been

developed somewhat along the lines of Anglo Saxon model. Australian system we can say is

both insider and outsider dominated. One of the interesting facts about Australian corporate

governance is ownership of listed company shares, they have both listed shareholding in all

the listed companies and there are several block holders and non institutional shareholding. It

is found that regulatory factors in South Korea are considered important for the organisations

to follow. They normally impose government rules and regulations on large firms, for them

industry size, firm risk are important for large organisations. Riskier the firm is better it

would be governed. It is recommended to South Korean firms that in case of foreign

ownership, if the company is holding more than 20% of ownership then the audit reports to

be disclosed should be both in English and Korean.

It is recommended that reforms should work within the system of Corporate Governance, to

result in a permanent effect. These policies must focus on the business culture, internal

structure and corporate culture of the system.

It is suggested that this can be achieved by promoting general awareness of the significance

of a strong Corporate Governance and by developing mutual trust and understanding between

the parties engaged.


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APPENDICES

TABLE 1 : Differences in corporate governance in south Korean and Australia

Differences on the basis of AUSTRALIA SOUTH KOREA

Power of Board Minor Very weak

Board members from

outside the

company(independence)

Many Almost non existent

Incentive to Managers Large (High) Low (Small)

Primary methods of

financing

Securities issuing Bank Loans

Type of ownership Dispersed (Individual and

Institutional Investors)

Concentrated ( family

group norms)

Capital Market Very Fluid Little Fluid

Banking Syatem Dispersed Transactions Main Bank system

Role of Small Share

Holders

Strong Weak

Function of the corporate

control market

Strong Almost non existent

Transparency in Transparent Semi Transparent


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management

Separation of ownership

from management

Perfect separation Incomplete separation

Style of Corporate

Governance

Uk style Anglo American

TABLE 2 : SIMILARITIES IN CORPORATE GOVERNANCE OF AUSTRALIA &

SOUTH KOREA

Basis of AUSTRALIA SOUTH KOREA

Participation of banks on

the board

small small

type of ownership family before 20th

century

family/group firms


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REFRENCES

ACCOUNTANTS, I. O. (n.d.). INSTITUTE OF CHARTERED ACCOUNTANTS IN

ENGLAND AND WALES. Retrieved 08 21, 2009, from

http://www.icaew.com/index.cfm/route/122444/icaew_ga/en/Technical_and_Busin

ess_Topics/Topics/Corporate_governance/An_overview_of_corporate_governance

Fleming, G. (Number 3, 2003,). Corporate Governance in Australia . Agenda,

Volume 10,.

LEE, S.-H. J. (2004). COMPETITION AND CORPORATE GOVERNANCE IN KOREA. UK:

EDWARD ELGAR PUBLISHING LIMITED.

MILAN, C. A. (2007). Corporate governance. In C. A. MILAN, Corporate

governance (p. 236). Oxford University Press, 2007.

OECD. (n.d.). UTS CENTRE OF CORPORATE GOVERNANCE. Retrieved 08 22, 2009,from UNIVERSITY OF TECHNOLOGY SYDNEY:

http://www.ccg.uts.edu.au/corporate_governance.htm

Yanagimachi, I. (February 2004). Chaebol Reform and Corporate Governance in

Korea. JAPAN: Graduate School of Media and Governance.


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analysis of corporate governance in south korea and australia

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